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Treasury accused of double-taxation blunder

A major double taxation threat has emerged in relation to the interaction between the government's crackdown on inheritance tax avoidance and capital gains tax in what opposition MPs claim may be a major Treasury blunder.

Confusion surrounded the discovery that if a taxpayer elects to abandon a tax avoidance scheme and render his estate subject to full inheritance tax – so as to avoid the new tax charge on occupancy of a property – capital gains tax will be based on the value of the property at the time of the original settlement, not the date of death.

MPs warned in detailed debates as part of the committee considering the Finance Bill that this could leave beneficiaries facing a considerable capital gains tax bill as well as enhanced death duties in a form of double taxation.

Paymaster general Dawn Primarolo promised to write to MPs to set out the position after a confused series of exchanges with shadow Tory chief secretary Howard Flight and Liberal Democrat spokesman John Burnett.

The mismatch appeared to arise out of a situation in which a person had set up a trust under which property passed to an heir, subject to lifetime residence by the owner, who would now face an income tax charge on an assumed rent under provisions in the Bill.

The owner can take advantage of a provision allowing him to elect to undo the intended inheritance tax avoidance scheme and render his estate liable to death duties instead.

Flight warned the committee: ‘Our understanding of the way in which the rules work at the moment is that Inheritance Tax is paid on the £2m [worth of the estate at death] but the deemed base cost at which the heir takes it is the value when it was transferred into trust 10 years ago – £300,000.

‘That seems to be unfair.’

He was supported by Burnett, who said: ‘If someone opts to pay the full value for inheritance tax purposes at death, they should always receive an uplift for capital gains tax purposes.’

Primarolo accused Flight of ‘attempting to rewrite the capital gains tax rules in a way that they do not currently apply to that regime.’

She said she did not agree with him because the purposes were different – and pointed out that someone who returned to inheritance tax could make use of the full relief for gifts with reservation – including the seven year rule for assets no longer part of the estate.

But Burnett agreed with Flight: ‘This looks like a blunder.’

He said the rules should be clear and were not. If the valuation bases were not the same for both tax purposes then the Bill would have to be changed at a later state so that they were.

Flight said: ‘It would be monstrously unjust for inheritance tax to be on market value on death and for market value on death not to be the carry forward cost for capital gains tax purposes.’